As the person who often deletes spam comments on this blog, I have been discovering that many of them are posted by other firms that engage in bankruptcy practice. Our firm also handles bankruptcy cases, but generally separately from our foreclosure defense practice.
Here is the obligatory disclaimer: We are a debt relief agency. We assist people with filing for relief under the Bankruptcy Code.
My own concerns about the ethical implications of comments that do not provide this disclaimer aside, I feel that it is important to give it before the jump. After the jump, I will talk about bankruptcy vs. loss mitigation strategies and when they are most effectively used.
Loss Mitigation
Loss mitigation is simply a fancy term for "minimizing loss." When an individual is faced with a foreclosure, one of the main motivations beyond saving the property is avoiding a deficiency judgment.
That deficiency judgment is the difference between the value of your loan and the sale price of your house. Most sheriff's sale auctions result in a significant deficiency for the homeowner because a) housing values are down and b) mortgages were issued at highly inflated property values. Even once the house is sold, the borrower may be liable for a deficiency judgment.
Loss mitigation seeks to avoid that deficiency by keeping the home out of the sheriff's sale process. Although there are four main methods of doing this, we generally use three out of the four.
Loan Modification
Loan modifications take a long time to arrange. We have found that, unless a client is also involved in litigation, obtaining a loan modification is highly difficult. Why this is the case is a bit mysterious. You would think that having a person in the home making payments would be better than an empty property. The government has promised to create new incentives for lenders to modify loans, so hopefully this will change.
Deed in Lieu of Foreclosure
The Deed in Lieu of Foreclosure has been previously discussed on this blog. It can be effective for a strategic foreclosure (also known as a defensive foreclosure) situation, particularly if the homeowner is current on payments or not yet in foreclosure. The Deed in Lieu essentially is you handing the keys back to the bank, which agrees to not pursue you for a deficiency judgment later. Properties that have more than one mortgage are generally not good candidates for this remedy.
Consent Foreclosure
A consent foreclosure is exactly what it sounds like --- consenting to foreclosure. This is done once the case is filed, usually after some negotiations and a bit of litigation as well. This goes "on your record" as a judgment against you. The good thing is that these also avoid deficiency judgments.
Short Sale
Although we do not do many of these, short sales can sometimes be useful. In my experience, however, the three loss mitigation strategies listed above make short sale a bad bet.
Bankruptcy
In general, it seems that many attorneys will push bankruptcy as the best possible option for most homeowners. While it is likely the best option for some people, it is my opinion that bankruptcy is very much a last-resort method for many consumers. Individuals that wish to keep their homes may have some success with a Chapter 13 filing. However, that Chapter 13 repayment plan will last three to five years. If a payment is missed, the case can be dismissed, which means that you have to wait to re-file. It also means that your creditors can pursue you for the money the lost during the repayment plan period. Also, if you complete the plan and receive a discharge, your mortgage will not go away. You will have to continue to pay it until it is paid off.
A Chapter 7 filing won't necessarily save your home. It can, however, protect you from a deficiency judgment. If all other loss mitigation attempts have failed or are unavailable due to your situation, a Chapter 7 may help. However, this option is largely for people who don't care about keeping their house. It is possible to reaffirm a mortgage under a Chapter 7 filing, but that rarely has the effect of lowering your monthly payment.
Summing it All Up
Beware of those who tell you to file a bankruptcy simply because you are facing or are in foreclosure. Make informed choices about your options and select the attorney with whom you feel the most comfortable. Be sure to read the information available on our website, it can give you a good background on the process and how things work. In many cases, bankruptcy is the very last option. However, as the saying goes, when your only tool is hammer, every problem looks like a nail.
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